UK inflation pushed to 14-month high of 3.5pc by increase in VAT

Britain's benchmark inflation rate jumped to 3.5pc in January to a 14-month
high after a rise in value-added tax.

Image 1 of 2

UK CPI inflation increased to 3.5pc in January.

Image 1 of 2

UK inflation: CPI v RPI

10:49AM GMT 16 Feb 2010

The Office for National Statistics said the return of VAT to 17.5pc had had the biggest impact on inflation. The Government reduced VAT to 15pc on a temporary basis until last month in a bid to boost consumer spending and ease the recession.

"Third, although the exchange rate has been broadly stable over the past year, the effects of the sharp depreciation of sterling in 2007 and 2008 are continuing to feed through to consumer prices.

However he said the direct effect of these factors on inflation should by only temporary and that inflation was expected to fall back to the target in the second half of the year.

The ONS said the heavy snow in January had also raised the price of certain seasonal vegetable prices, with cauliflowers rising by the highest amount since at least 1996 and the cost of carrots doubling.

Retail Prices Index (RPI) inflation, which includes the cost of mortgages and housing, also rocketed in January, to 3.7pc from 2.4pc, although it was below forecasts of 3.8pc.

The ONS said it would publish more details on the impact of VAT on inflation on April 20.

Howard Archer of Global Insight told Reuters: "Inflation was always going to spike in January due to the VAT hike and unfavourable base effects resulting from sharply falling oil and food prices a year ago.

"In addition, it appears that retailers engaged in significantly less discounting in the post-Christmas clearance sales this January compared to January 2009 when they had higher stock levels and were especially worried about the prospects for consumer spending."

David Kern, chief economist at the British Chambers of Commerce (BCC), said the figures meant the Bank of England's Monetary Policy Committee would not need to contemplate a rise in interest rates.

“By maintaining its current position, the MPC would make it easier for the Chancellor to present a more detailed plan for cutting the UK’s huge deficit in next month’s Budget – something that businesses across the country urgently want to see.”